At Last: Serious Talk About Reducing The Federal Budget

On Black Monday, Wall Street howled with such a force that President Reagan and Congress will have to respond this month by making some noises of their own.

At long last, Washington may be talking seriously about reducing the federal budget deficit.

How this Wall Street-Pennsylvania Avenue dialogue plays out could well determine the future of the nation's economy -- as well as the outcome of the 1988 elections.

Yet, in its first week of meetings, Reagan's bipartisan committee of administration officials and congressional leaders has produced little more than conciliatory rhetoric.

Undeterred, the markets closed out a strong week, more focused perhaps on the Federal Reserve Board's decision to expand the money supply than on the committee's failure to develop a compromise that reduces the budget.

As the markets rallied, Washington bandied about the notion of a spending freeze. But that by itself would not yield the $23 billion in deficit savings that is required this year by the Gramm-Rudman-Hollin gs law. Some argued that more than $23 billion would be needed if Wall Street is to be appeased.

The riskiest problem before the committee -- or ''economic summit,'' as it has been dubbed -- is if and how to raise taxes. With increases in corporate and individual rates off the table, the most likely starting point for new revenues is outlined in a budget-related measure now before Congress.

After much partisan bickering Thursday, the House approved its version of the budget measure by one vote. The measure would raise $12 billion in new taxes through such methods as extending the telephone excise tax, closing some mortgage loopholes for wealthy homeowners and repealing a tax break for defense contractors.

''This bill, in effect, is the Democrats' opening offer in the summit,'' said Rep. Buddy MacKay, D-Ocala, a Budget Committee member.

MacKay, who is not a summit participant, said he has heard that the committee is considering proposals that envision deficit savings of between $30 billion and $40 billion this year and cuts of similar size next year.

''We have to show follow-through,'' he said.

One way to show follow-through, MacKay suggested, might be for the president to establish a bipartisan deficit commission headed by Paul Volcker, the widely respected former chairman of the Federal Reserve Board.

If the summit is to succeed, economists here said, it will have to produce an agreement that substantiates the claim that both sides are willing to forego partisanship in the interest of devising a package that produces genuine deficit savings.

To do that, each side will probably have to offer up a pound of flesh. For Reagan, that could mean new taxes. For the Democrats, it could mean deep cuts in pet domestic programs. Reagan's acquiescence to a tax increase could send a powerful signal. If he agreed to a tax, he would be saying, in effect, that reducing the deficit is so important that he is willing to relent on the belief that has defined his political career.

''A small tax increase could be the glue that holds the deal together,'' said Sen. Phil Gramm, R-Texas.

Assuming there are concessions on both sides, the summit negotiators would still have to work out the ratio of spending cuts to tax increases. An even split? A 2 to 1 ratio? Should all spending programs receive equal treatment? Or should some be spared and others be terminated? Of course, if the market experiences a second Black Monday, these proposals could melt down quicker than the Dow Jones.

Just how the United States got into such an economic mess is at

the heart of a long, fractious debate.

Reagan and his conservative allies have routinely blamed the deficit on big-spending Democrats in Congress who were out, the Reagan team said, to expand the role of big government.

James Tobin, a Nobel Prize-winning economist at Yale University, offered a contrasting theory in a speech last summer.

As the interest payments on the national debt rose, he said, Reagan irresponsibly cut taxes and dramatically increased military spending.

Cranked up by such powerful stimulants, Tobin argued, the economic recovery of the 1980s tilted toward private consumption and defense spending -- activities that had the side-effect of devastating the U.S. trade balance.

Drawing on similar logic, many congressional Democrats advocate a tax increase that brings revenues closer to pre-Reagan levels. Even some Republicans agree on the need for some new taxes.

Two years ago Congress responded to deficit concerns by approving the Gramm-Rudman-Hollings law. Not only does this law seek to reduce the deficit through annual installments, it also seeks, through an automatic cut provision, to make budgetary gridlock politically uncomfortable. This law now serves as the framework for the economic summit.

Under Gramm-Rudman, Congress and the president must agree by Nov. 20 to a plan that yields $23 billion in deficit savings.